Category: Litigation
Cooley Alert: Will SCOTUS’ affirmative action decision affect your company’s DEI policies?
Many questions have been raised about the direct and indirect impact of the SCOTUS decision in in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (decided with Students for Fair Admissions, Inc. v. University of North Carolina, et al.), that using race as a factor in college admissions violates the Equal Protection Clause of the Constitution. This excellent Cooley Alert, Supreme Court’s Affirmative Action in Education Ruling Leaves Employment Diversity Initiatives Untouched—for Now, from members of Cooley’s Employment Group, provides many of the answers.
Disney decision to speak out on issue of social significance within board’s business judgment
Boards and their advisors seeking to navigate the culture wars and their often conflicting pressures from a variety of stakeholders and outside groups may find some comfort and guidance in this recent decision from the Delaware Chancery Court in Simeone v. The Walt Disney Company. The case involved a books-and-records demand from a stockholder asserting a potential breach of fiduciary duty by Disney’s directors and officers in their determination to publicly oppose Florida’s so-called “Don’t Say Gay” bill. Originally, Disney was silent on the bill. However, following reproaches from employees and other creative partners, Disney’s board deliberated at a special meeting, and the company changed course and publicly criticized the bill. The Court declined to grant the plaintiff’s books-and-records request, concluding that the plaintiff had not provided a credible basis from which to infer wrongdoing and thus had not “demonstrated a proper purpose to inspect books and records.” Rather, the Court concluded, the Disney board had made a business decision to reverse course—“a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.” Under Delaware’s business judgment rule, directors have “significant discretion to guide corporate strategy—including on social and political issues.” Importantly, the Court confirmed that, in exercising its business judgment, a board may take into account the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value.
SEC Director of Enforcement talks cyber resilience
In remarks delivered in 2022 before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler reminded us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. (See this PubCo post.) He might have said the same thing about cyber resilience—the topic of a Financial Times summit held last month and the subject of remarks delivered to that audience by Gurbir Grewal, the current SEC Director of Enforcement. What is cyber resilience? As defined by Grewal, it’s a concept that assumes that “breaches and cyber incidents are likely going to happen, and that firms must be prepared to respond appropriately when they do. In other words, it’s not a matter of if, but when.”
Commissioner Uyeda addresses shareholder proposal overload—is “private ordering” the answer?
On Wednesday, SEC Commissioner Mark Uyeda spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under rule 14a-8, a topic on which, historically, the commissioners’ energetic back-and-forth has been reflected in Corp Fin interpretations that have literally shifted back and forth. You might think these reversals are a new thing, but Uyeda reminds us about the goings-on in 2015, when Whole Foods was first permitted to exclude, as a conflicting proposal under Rule 14a-8(i)(9), a proxy access proposal, only to have the staff reverse course shortly thereafter. (See this PubCo post, this PubCo post and this PubCo post.) “Relying on the Commission’s rules, or its staff’s positions,” he later observes, “in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” However, Uyeda finds the reversals over the course of the last few years particularly problematic. In his view, the recent interpretative changes in SLB 14L have led to a surfeit of proposals the aggregate effect of which he finds to be “value-eroding.” He suggests some approaches to address the problem. Are we looking at a fundamental—some might say radical— reimagining of the shareholder proposal process?
SEC charges improper revenue recognition practices—still a hot topic for SEC Enforcement
Last month, Cornerstone Research told us that accounting and auditing enforcement activity by the SEC in FY 2022 increased by 55% over the prior fiscal year to 68 enforcement actions, 25 of which alleged improper revenue recognition. Among the actions involving accounting restatements, 63% involved allegations regarding revenue recognition and internal control over financial reporting. We also saw a steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability. (See this PubCo post.) With this new SEC Order charging USA Technologies, Inc., now known as …er… Cantaloupe, Inc.—clearly someone’s favorite fruit—with improper revenue recognition practices and ICFR violations, the SEC continues that trend. For their roles participating in these improper activities, the SEC also brought actions against USAT’s former VP of Sales and Marketing and its former Chief Services Officer.
Cooley Alert: 9th Circuit Upholds Delaware Forum-Selection Clause
This terrific Cooley Alert, Ninth Circuit Upholds Delaware Forum-Selection Clause, Dismisses Federal Derivative Action, from our Securities Litigation + Enforcement group, discusses a recent Ninth Circuit decision, Lee v. Fisher, upholding the enforceability of forum-selection clauses requiring shareholders to file derivative claims—even derivative claims brought under Section 14(a) of the Exchange Act—in the Delaware Court of Chancery. Because Section 14(a) claims can be brought only in federal court, the Alert points out, the upshot of this decision is that shareholders cannot assert derivative claims under Section 14(a) in any court.
NAM seeks to challenge Rule 14a-8 regulatory process for shareholder proposals
You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
SCOTUS decides Slack—in direct listings, tracing required for §11 standing
On Thursday, SCOTUS decided Slack Technologies v. Pirani in a unanimous opinion by Justice Gorsuch holding that, even in a registration by direct listing, §11(a) liability extends only to shares that are traceable to an allegedly defective registration statement. As you know, §11 provides statutory standing to sue for misstatements in a registration statement to any person acquiring “such security,” historically interpreted to mean a security registered under the specific registration statement. However, in Pirani v. Slack Technologies, a divided three-judge panel of the 9th Circuit had ruled that the plaintiff could recover under §11 even in the absence of tracing to the registration statement for the direct listing. Now, SCOTUS has reversed and remanded the case for reconsideration in light of the Court’s decision. Given the difficulty of tracing in connection with direct listings, where both registered and preexisting unregistered shares may be sold at the same time, the question put to Slack counsel by Justice Kavanaugh during oral argument in April looms large: does the Court’s determination in this case “essentially transform the ’33 Act into an opt-out regime for direct listings”?
Federal court holds unconstitutional California’s board diversity statute regarding “underrepresented communities”
There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)
Steep increase in accounting enforcement activity reported —especially against individuals
In this report from Cornerstone Research, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2022, Cornerstone tells us that accounting and auditing enforcement activity by the SEC increased sharply in FY 2022, although surprisingly, the aggregate amount of monetary settlements declined sharply. Perhaps most interesting is the steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability and perhaps, by extension, spurring action by executives to prevent misconduct at their companies. The report found that over “half of all actions involved individual respondents only, a sharp increase from the FY 2017–FY 2021 average of 37%. Following Chair Gary Gensler’s swearing-in [in April 2021] through the end of FY 2022, approximately 49% of actions were initiated against individual respondents only.” According to one of the co-authors of the report, “[u]nder Chair Gensler’s leadership, the SEC has identified ‘holding individuals accountable’ as a ‘key priority area’ in its enforcement program”…. So, it is not a surprise that the percentage of actions initiated against individual respondents in FY 2022 was notably higher than those actions initiated during Jay Clayton’s administration.”
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